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Banks and other financial institutions are the primary source of letters of credit for large companies. However, this type of business financing is not commonly available to the small to medium sized businesses who have similar needs. Fortunately, there is now another option available for those who cannot access the financial resources of the larger companies. This form of financing is called "Letters of Credit" and its often associated with other forms of cash flow such as purchase order funding, invoice factoring and trade financing. The following information should help you to determine if a letter of credit is what you need to help your company to prosper and grow.
Unlike banks and other financial institutions, factors (funding sources) that provide letter of credit are not subject to strict rules and limitations. Therefore, this form of financing may be an avenue of help that's available to businesses that cannot access similar assistance through a typical bank.
This financing is called a letter of credit and it's most appropriate for clients of funding sources who have a need to purchase products from overseas sources. Therefore, small to mid-sized business who conduct international transactions are prime candidates for letters of credit.
Clients who qualify for letters of credit usually utilize purchase order funding, invoice factoring and possibly trade financing from the same funding source (if possible). The purpose of all these services that are offered to qualified businesses is to help them to conduct business in a way that helps them to prosper and grow. This is a service that is fairly unique in the business community for companies that are not large enough to establish similar financing through a bank.
A letter of credit is simply a written payment promise of the entity (funding source) who is issuing the letter to a business (customer) that is supplying a client (beneficiary) of the entity with products. It is a business transaction in which the producer of such goods needs to have a guarantee of payment of its invoices by a third party (funding source) so that the buying company (client/beneficiary) can therefore make the purchase of goods - that they normally could not make on their own without prepayment or a line of credit with the company producing the products.
Some of the obvious benefits of utilizing a letter of credit to purchase international goods would be to gain products that are not available in the United States, get those goods or services at a much cheaper price, or, purchase greater quantities of goods that may not be otherwise available for acquisition domestically.
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